Inflation reports are manna for people who like to quote numbers, and yesterday's was no exception. There was obviously the 3.7% figure, which is how much prices jumped in December from a year earlier. That is up from 3.3% in November, which makes for the biggest month-on-month rise on record. And what largely accounted for the increase? Transport costs (up 3.6% in just a month – again, unprecedented), food (another record-breaking rise) and household fuel bills.

And here is another figure: 2%. That is the level at which the Bank of England is meant to keep inflation. Over one percentage point above that, and Mervyn King, governor at the Bank, has to write a letter to the chancellor explaining why and what action he will take. Given that oil and food prices are still spiking up, there will be plenty more missives heading from Threadneedle Street to the Treasury over the next few months. Bearing in mind that yesterday's set of figures were collected before the new year hike in VAT, it would be a brave soul who bet against inflation climbing to 4% by spring.

Two big questions emerge from this report – one for Mr King, and the other for George Osborne. The questions are essentially the same: what are you going to do about this? The Bank chief and his colleagues on the monetary policy committee (MPC) are bound to come under growing pressure to raise interest rates – or face losing their inflation-fighting credentials. The official line is the one trotted out by MPC member Paul Fisher in an interview yesterday: "It's uncomfortable having inflation above our target. But it's not what drives us from a policy point of view." And he is right: there is still little evidence of higher inflation (and RPI is bobbing just below 5%) leading to higher wage demands. Just over two years ago, during the last oil and food price surge, inflation was higher than it is now – only to fall back to almost 1% in 2009. Mr King and his colleagues should hold their nerve – and keep the key interest rate at 0.5%.

This does not make life much easier for the chancellor. For a start, it's the right of his own Conservative party who are sounding the most alarmed about inflation and calling for rates to rise. If workers do start asking for inflation-busting salary increases, then Mr Osborne faces the dreaded wage-price spiral. But if, as looks more likely, voters don't win such wage rises, they face a sharp squeeze on their living standards. Which leaves the economy facing three big deflationary threats: a historic cut in public spending, the possibility of rate rises, and consumers forced to consume less. A nasty combination. Where did Mr Osborne say he was keeping that Plan B?